Can Landlord Forfeit Lease for Deliberate Breach of Covenant?

Tenants who violate the terms of their leases can be forced to move. In one case, commercial tenants who sublet part of their premises to a Chinese restaurant without their landlord’s permission had their lease forfeited and were given six months to sell up and leave.

The tenants held a long lease in respect of a parade of shops with residential flats above them. The lease, which had been bought at a premium, yielded rack rent from sub-tenants of £133,000 a year and thus had considerable value. One of the terms of the lease was that no part of the premises could be sublet without the landlord’s consent.

In breach of that term, the tenants sublet a shop to a Chinese restaurant, which was the subject of much complaint from the landlord’s residential tenants in respect of poor waste management, staff smoking breaks, outdoor food preparation and noisy air conditioning units.

The landlord’s response was to forfeit the lease and, in refusing to grant the tenants relief against that decision, a judge found that their failure to obtain the landlord’s permission was deliberate and that they had shown a conscious and cynical disregard for their obligations under the lease.

By the time the case reached the Court of Appeal, the tenants had mended their ways. The Chinese restaurant’s sub-lease had been surrendered and the shopping parade was now being properly managed. The court had to grapple with the following question - should the landlord be allowed to forfeit the lease and gain a substantial windfall estimated at between £1 million and £2 million when the breach had been remedied?

The Court of Appeal made three points:

• A landlord should not be entitled to keep a windfall when there was no lasting damage to him
• A tenant’s conduct was a relevant consideration but the court had to consider whether depriving a wilfully breaching tenant of a valuable asset was proportionate
• In the circumstances of this case, the court granted the tenant relief from forfeiture but only for six months and only to effect a sale so the landlord did not receive a windfall.

This case is not to be interpreted as conferring carte blanche on tenants to disregard their covenants.  Where there is value in a lease the court will strike a balance between the interests of the landlord and the tenant. However Lord Justice Briggs accepted that if there was no other way of securing a tenant’s covenants, then the court would refuse relief even if that meant a substantial windfall for the landlord.